Until recently, becoming a subscription provider has been a big and expensive task. To get into the game, a vendor needed to build a subscription business model right next to its traditional businesses, so to speak, which typically involves building an ecommerce web store and member site, organizing an online price list and catalog, and figuring out how to handle subscription business receipts as well as shipping and dealing with returns.
There’s more too, like using analytics to understand the business and its relationship with customers. For example, businesses that send unique or curated bundles periodically, need analytics to determine the best possible recommendations to ensure customer delight and avoid costly returns.
Early on, vendors had to do all this themselves and many resorted to piecing together multiple systems available in the market. That was hard enough when ecommerce was a new thing but today any business entering the market must do so knowing that its competition is already up to speed, so there’s little room for mistakes.
Not surprisingly, ecommerce is commoditizing with vendors now offering most if not all of the things that vendors need to get going and to remain in the subscription business. OceanX is an interesting company in this regard. They offer a simple and easy way to take any retail business into the realm of subscriptions.
OceanX saw high barriers to entry as an opportunity. If it could build a platform that supported direct-to-consumer retail for a scalable number of businesses it would be able to lower their costs and, importantly, reduce the risks involved for any company developing an ecommerce business.
Making it work
Like many startups OceanX chose Amazon Web Services (AWS) to support its vision. That was nearly three years ago and the company saw success almost immediately.
One of OceanX’s early advantages was that as a platform it could offer integrated business processes from on screen shopping to cash. But equally important, all its platform apps capture and share customer data with other apps in the portfolio and this analysis gives partners important insights at all critical points in the customer journey—something that’s harder to do with a piecemeal approach.
In ecommerce especially, understanding the customer journey is paramount, and having data that partners can analyze is critically important to producing a personalized customer experience. We can broadly define this as experiences that satisfy customer needs and that keeps them coming back—two critical elements of success in subscriptions.
Supporting a subscription ecommerce model is, of course, harder than this general description. For instance, there are two basic subscription models, curation and replenishment. A curated model sends a selected or curated box of goods to a subscriber each month based on information the customer initially supplies which is later augmented by purchase history. A company engaged in sending curated clothing to subscribers needs to obviously know style preferences, sizes, and colors but also what’s been recently recommended and purchased. Two pairs of hiking boots sent in rapid succession is not a winning formula, neither is offering boots too soon after an initial rejection.
The curation model is the fastest growing part of ecommerce according to the Subscription Trade Association (SUBTA) which says that about 65 percent of subscription services use the curation model. So subscriptions to curated goods provide a great opportunity but also great challenge.
The second model, replenishment, may be more familiar. From shaving supplies to dog food and quite a bit more, subscribers can “set it and forget it” receiving a just in time delivery each month though they still have the opportunity to change order parameters like content, frequency and quantity. Importantly, only 14 percent of subscription vendors use the replenishment model.
But within these two models you can see the need for all the components of ecommerce including data collection for later analysis, members portals, order and change processes, and returns. OceanX provides its partners with a solution for all this that they don’t have to develop and maintain.
At the same time, it’s important for partners to maintain control of processing so OceanX runs warehouse and distribution systems and it picks and packs goods for its clients. However, payments are credited directly to partners’ bank accounts. OceanX is paid by its clients just as any other subscription supplier would be.
Ideal for brick and mortar?
You’d be right if you thought that brick and mortar retailers could take good advantage of the subscription model. After all, the retailers already have a brand, customers, supply chains, and they know retail and merchandising. In many ways this is an ideal setting for an omnichannel approach. But retailers still have to deal with things like pickups and returns and such situations as buy online but pick up and return in store and OceanX’s technology extends to all of this.
Importance of analytics
A lot of any subscription business depends on Key Performance Indicators or KPIs, measurements that can tell a vendor how many customers come back and what percent leave for instance. High retention rates (90 percent+, depending on the industry) indicate the vendor is doing well which limits the investment needed in replacing revenue that goes away for organic reasons. Other measurements include customer lifetime value (CLV), annual recurring revenue (ARR), and much more. Each measure provides insight into the health of the business both now and in the future and each depends on having a complete view of every customer and every process. It all comes back to collecting customer data and having the right analytic tools.
OceanX was initially successful with hosting its business intelligence and data platform, parts of its entire system, on AWS and it still uses AWS for orders and other parts of its platform. But success handed OceanX what you might call a high-class problem. It needed more horsepower for various functions like business intelligence, reporting, and analytics. That’s why the company began searching for a cloud-based solution that could give it more performance than AWS.
“We were faced with severe performance issues in our data loads and cube builds,” said Vijay Manickam, VP Data and Analytics. “We were left with an option to increase the CPU’s [with AWS] that would have costed us more license fees. To scale from there would have costed more. Oracle Exadata Cloud Services enabled better performance at a lower cost. We proved this with a POC [proof of concept] before we embarked on the migration. At a high level there was a 3x performance gain and about 30% reduction in TCO.”
With the POC in place, OceanX selected Oracle to support the lion’s share of the business intelligence platform in the Oracle Cloud. It also relies on Tableau for analytics and takes advantage of Oracle data transformation engines thus enabling it to maintain a single view of the customer across two clouds.
The reasons for moving to Oracle Exadata Cloud Services can best be summarized in Manickam’s words. “Our business depends on giving our clients who are sophisticated brands and retailers, complete visibility into their customers,” he said. “At the same time, we know how important it is to provide a personalized experience to customers. Both are highly dependent on having a single view of all customer data and being able to analyze it quickly and accurately.”
Those were the twin drivers at the company’s inception and the vision for building and operating its platform. The key to success, though, was more than those two things. Success also required a platform and infrastructure that could easily expand and provide the performance needed to do all of the back-end processing that few people see but everyone misses when it’s not present. The platform also had to support the greater security needs OceanX faced as a vendor itself.
OceanX’s journey with Oracle is still in its early stages. The company has not made a decision yet about moving its order management modules over from AWS for example. But directionally Manickam feels they’re on the right track. “We help our customers to continuously track and analyze all facets of their businesses, so we do the same with our business. We chose Oracle because of their experience in high performance systems.” So far it was a good decision.
I’ve been writing a forecast column every year at least since W was president. Nothing’s wrong with that, lots of people do. But I often find that my forecast is more of a wish list than a true prognostication so this time I’ll dispense with the fiction of analytical rigor and just say what I think needs to happen.
Platforms and leaders
First, the industry is consolidating. The big and successful companies are competing on a different plane than the smaller ones. The smaller guys are working harder than ever and some are realizing they need niches, that they’re not going to be able to cover the whole CRM landscape.
This is mostly a good thing because it clarifies the mission and lowers the costs of being in the market. I can also mean better and more verticalized software. But there are two basic kinds of these companies—those that have credible platforms and those that don’t. Among those that do I’d list several including Oracle, Salesforce and Zoho.
Oracle and Salesforce should not surprise but Zoho might. They’ve spent decades building a global solution and platform. There is only some overlap between the two with Salesforce attacking the really big enterprises and offering a huge ecosystem. But Zoho is a powerful solution for the small to mid-enterprise. It also has a good ecosystem. One of the big differentiators is how much ERP functionality you’re likely to need and where you plan to get it. Salesforce integrates well and has ERP partners like Financial Force. But Zoho offers good back office apps as a part of their service as well as having that ecosystem.
Another vendor in the mix is NetSuite which has been setting sales records since Oracle bought and significantly invested in them. NetSuite’s idea of CRM is eCommerce though, so customers will self-select.
So on the flip side, there are small-ish vendors still working on their own platforms and whose development teams are measured in the hundreds. The market leaders have thousands of developers in contrast, which is why it’s time for these vendors to find a niche and try to excel. With that comes a decision point about their platforms.
Next, we’ve had years of AI and social media, and even years of integration. I think it’s time for a year of integration on major pharmaceuticals. We need better networking and this needs to be led by the biggest names. A consortium including Microsoft, SAP and Adobe announced the Common Data Initiative (CDI) last year which I still think is not only too little, its major purpose is more aimed at slowing the advances of Oracle and Salesforce. Oracle’s autonomous database and enhanced security present a major challenge to other DB vendors. Salesforce is drafting behind the Oracle RDBMS on this one and has that advantage.
CDI focuses on building a common CRM data model and that sounds good, but it has too many moving parts as in potentially every vendor in the industry. Smarter people have said the better approach to making everything talk is to facilitate the communication at the API level. I agree. No surprise, some of the vendors conspicuously left off the Microsoft, SAP, Adobe invitation list, are pursuing the API approach, like Salesforce, and I think 2019 will be a banner year for more API centric networking.
We need that approach too, not just in CRM but throughout the tech world as we continue to build what will be a true information utility in the not too distant future.
Taking social seriously
Social media has deep roots in CRM—recall the year(s) of social CRM—and because it does, I think there’s subtle pressure in Silicon Valley for the likes of Facebook, Twitter, and all the rest, to clean up their acts and mature their business models and security plans.
Recent reporting shows that virtually every social network has either been compromised or willingly gave access to private information to entities that shouldn’t have had it. You can’t do CRM if customers get worried about how their data is being used. CRM is an unwilling victim of social shenanigans and they don’t want to be seen as willing partners, so the pressure is on.
Foolish social leaders will think they can wait out the federal government on regulation but that approach could backfire when the feds deliver a set of regulations that don’t work. Remember, many of the people who would pass this legislation are in their 70’s and have an archaic understanding of tech. Smart leaders will see this and volunteer to define what’s possible.
My two bits
I’m looking forward to 2019. I don’t think it will be a time of runaway growth and major innovation in CRM though I would be pleased to be proved wrong. In a consolidating world, there will be some losers too so be prepared.
I think the year ahead will impress by showing unprecedented innovation, of people and companies doing some unexpected things that make a lot of sense. I’m looking for the second or third tier of companies to be more aggressive in the mergers and acquisition arena in a bid to become more competitive. After a lot of years in this seat, I’m still having fun and I appreciate you letting me share my views.
There’s a confusing dynamic happening in the software industry caused by the inexorable shift to the cloud. Even before you can get into the analysis you need to identify which cloud(s) you’re thinking about (infrastructure, apps, platform). Also, once you’ve done that you need to decide if you’re partial to technology or financial analysis. It should be no surprise that either approach alone gives only half the picture, so you really need to engage on both fronts.
A big topic right now centers on whether vendors are growing their revenues fast enough to claim leadership positions in the cloud. If not, what happens to those not growing fast enough to satisfy the finance guys. Oracle is a case in point and the company has been subject to a lot of financial analysis that finds the company lacking. How you evaluate revenues, especially in comparison to peers helps you figure out the price of a share of stock. But it’s very hard to get to an apples-to-apples comparison.
As one recent post on Seeking Alpha declared, “Oracle’s ability to adapt to the decline of the on-premises software business and the rise of cloud/SaaS remains in question.” To which I say maybe because the analysis is only partly revenue related. Of equal importance is the changing revenue model—taking in incremental revenue rather than a big license fee.
Moving to the cloud changes the business model, not just the product and too often I see financial analysts applying old financial models to new technology and business models and it doesn’t work well.
For most companies the easiest customer to re-sell or up sell is one you’ve sold to before but migrating your installed base to the cloud is anything but easy if you sold them legacy solutions. The effort is more akin to selling for the first time. No decision which can be frustrating in any sales situation is just as prevalent in an installed base as it is in the general market even for an incumbent vendor.
So in the horserace that some financial analysts insist on handicapping, a pure cloud vendor will usually look better than a legacy vendor moving there. But on top of all that, when your analysis is based on revenue growth you can get spurious results. Even if a legacy vendor induces an existing customer or a group of them to convert, the revenue impact is likely to be a short-term reduction because we recognize cloud revenue over time, not all at once.
We are unarguably in a transition-state so we see a mixed industry. But if you go down the road a few years to a time when the major conversion from legacy to cloud is over, the whole industry will look more uniform and comparisons will be easier.
But it will also be a more fragmented market than we have now. Software vendors will have many complex relationships between themselves and infrastructure vendors and it will be far from unusual for Brand A software to be running on Brand B infrastructure even though both brands might offer both software and infrastructure.
All of this suggests to me that the real plain of competition will have to change. It will change because the vendor communities want to avoid the zero-sum rut that markets invariably head towards in a commoditization push that leaves the survivors competing for pennies when they once competed for millions.
That’s why I see the industry morphing into a utility where a small oligopoly controls most aspects of the market, usually under some form of regulation. A utility won’t care much about infrastructure, for instance, because it will all be the same from the perspective that it adheres to standards.
The electric utility industry is a fitting example. Electric devices are agnostic over how power is generated or whether it comes from next door or a thousand miles away though some customers might prefer greener or cheaper solutions. But vendors in the supply chain take responsibility for adhering to and maintaining standards so that the product is uniform.
It’s doubtful at this stage if any of the enterprise software vendors will stub a toe getting to the cloud. Each has a unique path to travel that’s based on history and legacy constraints. At this point, rather than comparing vendors in what is a very disparate market, it might be wise to look more at year-over-year comparisons and similar measures that track a vendor’s progress against the goal. Revenues and revenue growth will, of course, always be important but the handwringing that goes into quarterly analysis and that emanates primarily from looking at a still emerging market and seeing a long established one, obscures reality and benefits no one.
Salesforce’s embrace of Rimini Street’s third-party support services is a significant departure that has transformed the support vendor from competitor to partner—at least with Salesforce. It might also offer insight into changing cloud business models. At least it helps to make sense of recent litigation involving Rimini and Oracle.
Rimini Street began life as a support vendor for enterprises running Oracle and SAP software in the traditional on-premise model. In this incarnation Rimini quickly and inevitably became a direct competitor taking support revenue from enterprise vendors. Competing for support revenue is legitimate provided the third-party vendor conducts itself lawfully, respecting patents and copyrights to intellectual property concerning the systems being supported. The third-party also has to grapple with providing patches and updates that an OEM can provide.
Typically, enterprise software vendors charge a flat percentage of the licensed software fee for support services. Regardless of the terms of the deal a business strikes with a vendor over the software purchase, the services fee is almost always calculated on the list price; so with fees around 20 percent an enterprise can end up re-buying the product every five years or so.
To be fair, there’s a significant cost built into providing service and support which includes on-going R&D, patches, updates, fixes, and bulletins, as well as live support based on a service level agreement of SLA. Customers are always trying to get a better deal and vendors need to hold the line on pricing to cover their costs and generate a profit, which is the point after all.
Third parties have a lower bar—since they don’t write the original software or upgrades their overhead is lower. But that’s the point. They don’t own the source code and so they can’t patch it, a key reason for buying support in the first place.
Rimini has announced what we can call “patches to patching” which it named holistic and virtual patching. But each of these ideas works several levels of abstraction above the source code never actually patching it. The result is that systems are still in jeopardy. So the basic low cost inducement of third-party support vendors is in some cases, specious. They charge less but they also deliver less and the difference can leave an enterprise vulnerable to hacking, and down stream effects like brand erosion and lost trust and lost revenue.
Oracle has had a long simmering law suit against Rimini, which exhausted the appeals process recently. In the verdict, Rimini was shown to have “borrowed” materials from Oracle by simply downloading them from support sites.
After Rimini lost on appeal, it issued a strange statement that was carried in the UK Register and elsewhere saying,
“The Court of Appeals, while affirming the jury’s finding of ‘innocent’ copyright infringement for processes that Rimini Street claims are no longer in use since at least July 2014, stated that Rimini Street‘ provided third – party support for Oracle’s enterprise software, in lawful competition with Oracle’s direct maintenance services,”
Which roughly translates as, we did nothing wrong and we won’t do it again.
It’s quite hard to provide in-depth support if you don’t have inside knowledge of how systems work and don’t have the source code which you need to make a patch. Oracle’s case revolved around Rimini Street’s appropriation of copyrighted support materials produced by Oracle. Specifically, the enterprise vendor accused Rimini of violating up to 93 copyrights on its support and materials and the judgements, including appeals, went against Rimini though some monetary awards were later reduced.
A new model
Since the rulings and fines, Rimini has been seeking a better way to do business and it may have found it with Salesforce. If so, it could be a new model for other cloud vendors as well.
Rimini provides 24/7/365 support for selected Salesforce applications, which now include Salesforce Sales Cloud and Service Cloud, with 15 minute response time. Salesforce and other cloud vendors offer services for their products too but generally customers have to pay more for the advanced features that Rimini provides standard. So the competition is between Rimini and, in this case, Salesforce’s advanced support services, a choice that customers are free to make. Judging by the announcement of the services, Salesforce is in favor of the arrangement and views Rimini as a partner.
Here’s why. Rimini Street CEO Seth Ravin recently told ZDNet,
“The SaaS world is different in that maintenance is included in licenses and mostly bare bones.”
Simply put, there’s more room in a cloud situation for Rimini to add value.
Let’s separate call center service from updates and patches. Only Salesforce patches its products and it does so whenever needed as well as with three annual updates. So, the thorny issue of third-party patching is off the table in the Salesforce model. No patching requirement makes it much less likely that Rimini or anyone else will need to do the things that Rimini was found guilty of in the Oracle case.
With a cloud business model a vendor builds support costs into the monthly fee and that includes further product development and enhancement as well as some amount of live support but the cloud vendor gets paid no matter what. There’s no haggling over service fees—either the customer buys what the OEM has or goes to a third-party and pays there. As a result it’s far easier for Rimini to be seen as a partner by a cloud vendor, than as a competitor.
So the difference in how support is delivered and paid for may turn out to be a significant additional inducement to legacy customers contemplating a move to the cloud. In any event, it is reasonable to conclude that the on-premise version of service and support may be going away.
At some point companies like Oracle might begin to view third-party support service providers more as partners than competitors just as Salesforce does. But the change won’t be quick or uniform. Oracle’s bevy of cloud products still have numerous configurations that enable customers to straddle cloud and on-premise positions with different support modalities. For instance, Oracle’s BYOL, Bring Your Own License, program enables customers to move an on-premise app to Oracle’s infrastructure cloud (IaaS). So, the application retains its legacy character, and presumably its support liability, even though it runs in the cloud.
Deploying a modern, cloud version of the app might remove the annual support bill but at the cost of an incremental SaaS fee by the month or contract year.
Few enterprises will decide about moving to the cloud over the cost of application support alone. The move involves a complex matrix of costs for hardware and software—including everything in the stack. There are also considerations for labor. Given Oracle’s new push into automated products in database, security, integration and other areas we can expect cost savings for some premise-based systems but that remains to be seen.
Oracle is making its customers’ move to the cloud as cost effective as it knows how and it’s likely that early movers will get the best deals. Something else to consider for the vast majority of Oracle’s customer base with its feet planted firmly on the ground.
For some time now, it’s been my impression of the CRM market that all, or at least most, of the good ideas have been taken. It’s been a long time since we saw a new systemic solution that approaches front office business. It’s even been a long time since we saw a major innovation at the department level.
CRM itself was a systemic innovation in the last decade of the last century. Cloud-based CRM was the innovation of the new millennium and since then, marketing automation would count as a departmental innovation. You can also look at analytics as a systemic innovation because although it straddles departments, it has become a department itself.
This is not a bad thing, just the opposite. As CRM has been built-out it has opened new market niches which has maximized the number of solutions and, more importantly, it has made all of them affordable to just about any business. As I’ve said before, cloud computing is the commoditization of IT. It has made information processing both simple for a lay person to use and so affordable that all those who want it can have it.
CRM is far from done as an approach to business and as an economic driver, but we must acknowledge we’re at a turning point. Behind the scenes the major vendors, among whom are Salesforce, Oracle, and Microsoft, have gone a long way toward consolidating the industry by platform and from here that will be the dividing line.
So far this spring I’ve attended two conferences that illustrate my point, SuiteWorld and Financial Force’s analyst day. Each company has financials and ERP solutions that address the needs of small and medium and in some cases larger businesses. Each is deployed on a specific platform: NetSuite on its own which it announced is moving aggressively toward the Oracle Cloud Infrastructure, and Salesforce whose solution encompasses development platform and infrastructure.
While it’s quite possible that many customers will continue using hybrid solutions such as NetSuite for back office operations and Salesforce in the front office, it’s already easy to see that situation morphing. Oracle has for many years used the logic of running a suite of related software over an integrated solution made up of best of breed apps. It is continuing this logical progression with NetSuite both on its own and as a member of the Oracle family.
Salesforce is using a derivative of this logic too. While Salesforce is and will likely always be a front office company, its powerful platform and AppExchange gives partners the ability to build completely compatible applications that help customers achieve suite status. After all, that’s the logic of having a platform to start with. A platform supplies a consistent set of programming tools, interfaces, objects, data structures and more—standards—so that apps built on it can interoperate. It’s the same logic as building a hardware bus so that manufacturers can build to common standards. It’s popular because it works.
So, the play as I see it for any software companies not named Oracle, Salesforce or a small group of others, is to pick a platform, become intimately involved with it, and pursue the surrounding ecosystem as your market.
Some vendors have begun working with two or more platforms and that’s fine if they have the resources, but I see that as a short-term gambit designed to see which platform vendor is the best partner.
All of this is vitally important. As I mentioned last time, the meme making the rounds is that it’s easier to start than grow a company, especially in tech. I can see this and deciding on a platform and an ecosystem to work in is one of those things that can help reduce overhead and enable a business to better focus on the things that really matter for growth, like markets and customers.
My two bits
CRM has been a wild ride for two decades and the ride continues. At this stage it’s important not to get sucked in to the latest discussions of digital disruption, IoT, analytics or anything else that looks bright and shiny. They’re all important as secondary considerations but I think the most important thing, and in some ways the least glamorous, to concentrate on is what vendor and which platform you want to work with over the next decade and beyond.
Markets converge. Fifteen years ago, few vendors had complete CRM suites and now they all do. Today we’re looking at far more complex and sophisticated front office applications as vendors take on vertical market apps. These apps combine back office data, front office processes, intelligence and machine learning and highly specialized subsystems for everything from manufacturing to healthcare. In this new environment who has time for platform incompatibilities?